Valuing Your Business for Sale
Determining a fair market value for a business is not a precise science, and can vary depending on the type of business and the reason for a request of a valuation appraisal. There are a wide range of factors to consider – from the book value of the assets, to a host of intangible elements. The value of the business will rely on an analysis of the company’s cash flow, its past and current earnings, and the sustainability of those earnings. In other words, its ability to generate consistent profits will ultimately determine its worth in the marketplace.
Using LINK Business
Through LINK Corporate Division, we focus on acquisition, divestment and facilitation of the sale of private companies. Over the past few years, we have facilitated the sale of over 200 businesses with sale prices in excess of $1 million.
The comprehensive database at LINK and the statistical evidence derived there-from, together with our involvement with various industry statistical databases, indicates the value of those businesses with sound profitable history by using an “industry” multiplier - the PE (Price to Earnings) Ratio. This multiplier fluctuates and is market sector driven.
However, whilst earnings history is key to most business valuations, the PE Ratio may not necessarily be the best indicator of value. Strong, but under-performing assets and revenue strengths, where price to sales will have an influence on the methodology used, can be equally important.
An industry specific formula has been devised by LINK, based on the “real world” out there in the market. Most business valuation methodologies should recognise market evidence and industry specific practice.
Basically, there are 3 business valuation approaches:
• Earnings based
• Asset based
• Market based
All three are considered in our valuation appraisal & opinion approach. A fair market approach based on industry experience and comparable sales may well be the most accurate indicator of value.
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How LINK price your business
Our approach to business valuations use market data as a backbone to give you real world context around your category of business.
Broadly, we use the Advisory Engagement Standard No.2 (AES-2) as set down by the Institute of Chartered Accountants and covering independent business valuation engagements.
In general, differing approaches will be used depending on the size of the business - small businesses make up over 95% of all NZ businesses - therefore statistical evidence and market data from actual sales may be the most accurate indicator of value.
The Valuation Appraisal Opinion
Our opinion on the total value of the business is usually given on a Going Concern basis.
The sustainability of earnings will be based on the historical and current earning capacity of the business, (i.e. willing, informed but cautious buyer’s expectations of the ability of the business to maintain profitability for a foreseeable period of time).
We provide a complete report relative to all aspects of the business, taking in to account:
- the financial documentation supplied
- the business culture and infrastructure
- its relevance to its market sector
- assessment of risk factors and the market within which it trades.
Our opinion on Business Value will be directly related to:
- The industry average multiplier on true earnings. We emphasise that this multiplier is market driven and varies according to perceived industry risk factors, perceived earnings sustainability and historical comparisons.
- The fair market value of the unencumbered assets (e.g. plant, fixtures, fittings, equipment and in certain cases the value of debtors) = the value of stock at historical cost.
- Goodwill/Intangible Assets. Because of the intangible nature of Goodwill and the various factors that comprise this asset, the valuation method adopted will depend on the circumstances of each particular business. No one method can be used for every business as each business has its own specific characteristics with regard to mix of tangible and intangible assets. We understand and can provide the market evidence of required rates of return (ROI) for business investments with various degrees of risk.
For Further Information about this article, contact your nearest LINK Business Broking office at: